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Clearly the downside break-out of the US dollar helped to support solid gains in metals and all commodity markets yesterday, with the CRB index up more than 4%. The clash of inflation bulls and deflation realists looks to continue over the near-term and that seems to have confused the gold trade. In a deflationary environment there can be an incentive to sell inventory in an effect own cash and for end users deflation causes them to operate on a hand-to-mouth basis. But with the persistent hope of stimulus plans surfacing on a frequent basis the deflation crowd is finding it harder to dominate sentiment. Perhaps the markets may react to the US pending home sales data today, but the overall scheduled US economic report slate is fairly slow today. In fact ongoing hope for a US auto sector bailout, or at least a temporary bridge loan for the Big 3 is still being seen as a supportive prospect for the metals markets. On the other hand, seeing a slightly smaller amount of only $15 billion in temporary loans to the auto makers could water-down the bullish impact of the package to the metals markets. While gold and silver prices don’t seem to be distinctly benefiting from the early attempt to rally in US equity prices today, upbeat equity market action does seem to favor the metal bulls in the current environment.

GOLD MARKET FUNDAMENTALS: Ongoing economic optimism, stock market gains and a general rally in a host of commodity markets were all supportive forces for gold prices yesterday. Clearly ongoing talk of a compromise US automaker bailout on top of an infrastructure investment plan announced by the President-elect on Saturday (that attempts to add 2.5 million new jobs to the economy) was in sharp contrast to the negative economic news that pounded the markets last Friday morning. However, the market currently sees deflation being tamped down and while that might only last a few days before the reality of the current state of the economy sets back in, the bulls would seem to have a slight edge today. In fact, with a $4 billion spending package in India seen overnight and a proposal for a 200 billion euro package in Europe adding into the world wide stimulus effort, it would seem like overt slowing fears are being countervailed. News that South African gold production was down 14.4% in October from last year should provide another layer of fundamental support for prices even though the market is largely aware of the pattern of declining production from South Africa. In the end, a number of the bullish forces seen in gold this morning are being countervailed by a minor up tick in the US Dollar.

SILVER MARKET FUNDAMENTALS: The market benefited from a more optimistic economic outlook yesterday and in the process traded through last week’s highs. Gains in the stock market and ‘hope” generally improving economic conditions in the wake of a steady stream of global stimulus efforts continues to provide underlying support to the silver market. But it could still take a more optimistic view on the global economic outlook before the pendulum fully swings into the bulls favor. While it might be premature to view the many stimulus packages around the world as factors which will boost short-term demand for silver, those offerings have managed to temper deflationary selling interest. Ongoing labor problems in Mexico also lent support yesterday, as union representatives threatened to go back on strike at the world’s largest silver mine, Fresnillo. However, sagging physical demand remains a key negative force for the silver market. But with a noted decline in silver exchange stocks seen overnight, it is possible that the bull camp in silver will have a slight fundamental edge into the US trade today. In fact, a growing string of upside closes for the US stock market is beginning to provide underlying support for many physical commodities but the big question is, can the US stock market continue to rally once the auto sector bailout deal is decided?

COPPER: The market gave back a huge portion of yesterday’s rally overnight as traders seem to be having second thoughts about the short-term demand prospects for copper. Short-covering and massive stimulus programs proposed in Europe and the US, as well as a massive spending program in India combined with last week’s news of stimulus in China has helped to support the recent surge higher. However, the copper market can hardly expect to see a constant ongoing flow of stimulus efforts ahead and that would seem to leave the market locked into a trade below $1.50. In fact, with an ongoing pattern of LME copper stock gains, talk of global manufacturing capacity reductions and a host of layoff announcements, one has to think that the fundamental bias in copper prices is set to remain down. Certainly the copper market was oversold and in need of a corrective bounce. But given that March copper almost managed a 20 cent bounce off last week’s lows we suspect that the technicals were balanced and that could allow for another new low in copper prices later this week. In fact, once the markets get beyond the US auto sector bailout issue, the main focal point of the trade could return to classic slowing views and that should leave the bear camp in control.

This content originated from – The Hightower Report.